Further & More

How to Bank on Private Insurance

Why should the government be in the business of providing deposit insurance for banks? As noted in various Trends reports, analysts from the Heritage Foundation to Harvard Law School have recently pointed out how the Federal Deposit Insurance Corporation, free from the real-world constraints of private insurance, fails to restrain foolhardy bankers and penalizes the prudent.

Now, two economists with the Federal Reserve Bank of Dallas have broached the same conclusion. In an article in Dallas Fed late last year, Eugenie D. Short and Gerald P. O'Driscoll decried the FDIC's one-size-fits-all premiums for banks. "Sky divers and race-car drivers pay more for accident and liability insurance than do bankers and accountants," they noted, whereas the fdic charges the same premiums to banks regardless of the risk the banks are taking.

The agency has proposed a reform, noted Short and O'Driscoll: basing premiums on three risk categories- normal, high, and very high. But they suggested that this isn't adequate, since regulators still wouldn't face the incentives that the market provides private insurers to determine realistic insurance rates.

The two Fed economists proposed several policy changes, including the introduction of coinsurance, eliminating the legal requirement that banks purchase insurance from the FDIC, and requiring the FDIC to cover its own cost and earn a reasonable return on capital. While private insurance companies are not able to provide substantial amounts of deposit insurance immediately, "an environment could be created to enable firms to enter gradually as competitors to the FDIC."

Calling Up The Future

"Wondrous advances in solid-state physics have conjured up a profusion of technologies providing new means for circumventing-or 'bypassing'-the local phone company." Thus wrote Peter Samuel in Reason's October cover story, "Hanging Up on Your Phone Company."

That future world of greater telecommunications freedom is edging ever nearer. Three recent developments are especially noteworthy.

First, several major car-rental firms have installed cellular radiophones in some of their rental cars in Chicago, where the nation's first cellular system went into operation in October. (Such systems are expected to be operating in 30 cities within two years' time.) Hertz and Budget each have 100 phone-equipped cars available in the Chicago market, and National has 10.

Second, both AT&T and MCI Communications Corp. are installing in airports credit-card-operated public phones for making long-distance calls. (By federal regulation, only local phone companies are permitted to operate coin phones.) The MCI phones take Visa and Master Card charge cards-thus allowing holders of these cards to use the phones even if they are not subscribers to MCl's discount long-distance service-while AT&T's phones, which use a special AT&T card, are available only to those with AT&T accounts. Both companies are likely to install more of their credit-card phones in bus and train stations and in convention centers as well as in airports, areas where public-phone use is high.

And third, in November New York City's second-largest office-space landlord, Olympia & York, announced plans to set up a satellite communications network linking tenants of the firm's buildings (and thus bypassing the local phone monopoly, New York Telephone). The private network will provide local and long-distance voice communication as well as computer-data communication.

Olympia & York's partner in the communications venture is United Telecom, the nation's third-largest telephone company (after AT&T and GTE Corp.). While New York Telephone is fretting that such a bypass network will significantly cut into the monopoly's revenues by taking away nyt's high-use business customers, United Telecom has realized that bypass is a thing whose time has come. Quoted in the New York Times, United Telecom chairman Paul Henson remarked: "We are joining the other side now."

Blazing Battle Lost

In Dover, New Hampshire, the chances of contracting out fire-fighting services have gone up in smoke.

Shortly after we reported on the bitter political struggle in the small New England town over the issue of hiring the Wackenhut Corporation, a private firm, to handle the city's fire fighting ("Blazing Battles," Nov.), Dover held its municipal elections. Of the five city council members who had voted for the contract the previous summer, only three were reelected, shifting the council from a 5-4 majority in favor of contracting to a 6-3 majority against.

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